Gary Lesser

The 50% participation rate test can be found in Code Section 408(k)(6)(A)(ii).

Please clarify question. 401(k) simple plans do not utilize IRAs. Also, if a 401(k) SIMPLE, is entire plan being terminated? If so, matching contributions must be made before the plan is terminated; otherwise their will be no plan to accept the matching contributions and the elective contributions will become excess contributions. If a SIMPLE-IRA, the matching contributions can be made into the SIMPLE-IRAs. If they no longert exist because the individuals/owners have closed them out, then new ones will have to be created to receive the contributions.

Perhaps with some more facts someone could reply (e.g., a full census in tabular format: comp, age, dob, doh, 1000 hrs, and so on). A plan consultant/administrator might be helpful in alternative plan designs. A 401(k) plan comes to mind. Various P/S allocation methods are available. Which is best depends on needs and objectives of the employer and all of the facts.

It would look like a correction request needs to be submitted to the IRS first since it is ousite of EPCRS. Whether this is required in the form of a PLR I'm not sure. Revenue Procvedure 2002-47 provides at Section 2.02(2)-- The Service and Treasury are considering expanding the procedures under EPCRS and are interested in receiving comments regarding, among other things, appropriate correction procedures for failures arising under SIMPLE IRAs (under § 408(p)) and §§ 457(B) plans. Submissions related to SIMPLE IRAs are currently being accepted by the Service on a provisional basis outside of EPCRS. Submissions relating to §§ 457(B) eligible governmental plans will be accepted by the Service on a provisional basis outside of EPCRS. Submissions relating to other §§ 457(B) eligible plans may be accepted outside EPCRS as Employee Plans develops experience in the §§457 area. PART II. PROGRAM EFFECT AND ELIGIBILITY SECTION 3. EFFECT OF EPCRS; RELIANCE .01 Effect of EPCRS on Qualified Plans. For a Qualified Plan, if the eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a Qualification Failure in accordance with the applicable requirements of SCP in section 7, VCP in sections 10 and 11, or Audit CAP in section 13, the Service will not treat the Qualified Plan as failing to meet § 401(a). Thus, for example, if the Plan Sponsor corrects the failures in accordance with the requirements of this revenue procedure, the plan will be treated as a qualified plan for purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(B)(5) (FUTA taxes). .02 Effect of EPCRS on 403(B) Plans. (1) Income taxes. For a 403(B) Plan, if the applicable eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a failure in accordance with the applicable requirements of SCP in section 7, VCP in sections 10 and 11, or Audit CAP in section 13, the Service will not pursue income inclusion for affected participants, or liability for income tax withholding, on account of the failure. However, the correction of a failure may result in income tax consequences to participants and beneficiaries (for example, participants may be required to include in gross income distributions of Excess Amounts in the year of distribution). (2) Excise and employment taxes. Excise taxes, FICA taxes, and FUTA taxes (and corresponding withholding obligations), if applicable, that result from a failure are not waived merely because the failure has been corrected. .03 Effect of EPCRS on SEPs. For a SEP, if the eligibility requirements of section 4 are satisfied and the Plan Sponsor corrects a failure to satisfy the requirements of § 408(k) in accordance with the applicable requirements of SCP in section 7 (but only if the corresponding Qualification Failure is an insignificant Operational Failure), VCP in sections 10 and 11, or Audit CAP in section 13, the Service will not treat the SEP as failing to meet § 408(k). Thus, for example, if the Plan Sponsor corrects the failures in accordance with the requirements of this revenue procedure, the SEP will be treated as satisfying § 408(k) for purposes of applying § 3121(a)(5) (FICA taxes) and § 3306(B)(5) (FUTA taxes).

Yes. The Roth IRA regulations state: An amount in an individual's SIMPLE IRA can be converted to a Roth IRA on the same terms as a conversion from a traditional IRA, except that an amount distributed from a SIMPLE IRA during the 2-year period described in section 72(t)(6), which begins on the date that the individual first participated in any SIMPLE IRA Plan maintained by the individual's employer, cannot be converted to a Roth IRA. Pursuant to section 408(d)(3)(G), a distribution of an amount from an individual's SIMPLE IRA during this 2-year period is not eligible to be rolled over into an IRA that is not a SIMPLE IRA and thus cannot be a qualified rollover contribution. This 2-year period of section 408(d)(3)(G) applies separately to the contributions of each of an individual's employers maintaining a SIMPLE IRA Plan. Once an amount in a SEP IRA or SIMPLE IRA has been converted to a Roth IRA, it is treated as a contribution to a Roth IRA for all purposes. Future contributions under the SEP or under the SIMPLE IRA Plan may not be made to the Roth IRA.

Assuming the amount was contributed as a 2002 SEP contribution, you are absolutely correct. Arguably, however, the correct approach would be dictated by the written statement required to be provided to the employee indicating the amount of the employer's contribution for the year. The statement is required to be furnished within 30 days of the contribution or January 31 following the "calendar year for which the contribution is made." [Prop Treas Reg 1.408-9(B) (Note that at the time the proposed regulations were written, SEPs had to be maintained on a CY basis.)] So, we are back to the issue of whether the contribution was made for 2001 or 2002! Since the contribution was made several months ago (and the facts stated it was was a 2001 contribution), I naturally assumed it was made for 2001 and treated it as an excess. If so, it could be subject to penalties unless corrected. Revenue Ruling 76-28 (modified slightly by Rev Rul 76-77) does not apply to SEPs (because IRC 404(a)(1)-(3) is not involved), notwithstanding that the language of Code Section 404(h) is similar to the "special rules for SEPs" under Coder Section 404(a)(6). Revenue Ruling 76-28 was written a few years before SEPs came into existance (i.e., in 1979). IMO, it would make more sense to go with the proposed SEP regulations in determining whether the contribution was, in fact, made for 2001 or 2002. If no notice was given within the 30 day period (and it might not have been), then arguably the entire $7,000 contribution is a 2002 contribution (all of it! :eek: ). If the notice was given (within 30 days), then some, but not all, of the amount contributed is an excess nondeductible contribution In all likelyhood, the Service would use the proposed SEP regulations to determine which year an employer's SEP contribution was "made on account of." Otherwise, it would be difficult, if not impossible, to determine if and when an excess contribution was made (see, too, the IRC 402(h) exclusion rule).

I guess it's a possibility, but the facts didn't indicate such. I imagine that a SEP would have to be individually designed and there aren't too many of those. My mind is going too, that's why I put everything in print. To be a QSLOB -- From RP 93-42 which was modified by RP 95-34 -- (1) meets the criteria for a line of business for the testing year under section 1.414®-2 of the regulations and for a separate line of business for the testing year under section 1.414®-3 of the regulations; (2) meets the 50 employee requirement of section 414®(2)(A) of the Code on each day of the testing year; (3) does not satisfy any of the administrative scrutiny safe harbors of section 1.414®-5(B) through (g) of the regulations; and (4) satisfies at least one of the following standard access alternatives: (a) The highly compensated employee percentage ratio of the separate line of business for the testing year, as determined under section 1.414®-5(B) of the regulations, is at least 40 percent and not more than 250 percent; (B) Ninety percent of the gross revenues of the separate line of business result from the provision of property or services that fall exclusively within one or more industry categories established by the Service (through Rev. Proc. 91- 64), under section 1.414®-5© of the regulations, and no more than ten percent of the gross revenues of any of the employer's other separate lines of business result from property or services provided to customers of the employer that fall within the same industry category or categories; © The employer is not required to file Form 10-K or 20-F, but there is a certification from an independent certified public accountant that the employer would have been required to report the separate line of business as one or more reportable industry segments on either the Form 10-K or the Form 20-F if the employer had been required to file the applicable SEC report for the employer's fiscal year ending in the testing year, and the separate line of business therefore would have satisfied the administrative scrutiny safe harbor in section 1.414®-5(e) of the regulations; (d) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414®-5(B) of the regulations, of less than 40 percent, and either -- (i) The separate line of business would satisfy the average benefits safe harbor of section 1.414®- 5(f)(2)(ii) of the regulations if the actual benefit percentage of the nonhighly compensated employees of the other separate lines of business were reduced by one-third, or (ii) The separate line of business would satisfy the minimum benefit safe harbor of section 1.414®- 5(g) of the regulations if the minimum benefit were reduced by one-third; (e) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414®-5(B) of the regulations, of more than 250 percent, and either -- (i) The separate line of business would satisfy the average benefits safe harbor of section 1.414®- 5(f)(3)(ii) of the regulations if the actual benefit percentage of the highly compensated employees of the other separate lines of business were increased by one-third, or (ii) The separate line of business would satisfy the maximum benefit safe harbor of section 1.414®- 5(g) of the regulations if the maximum benefit were increased by one-third; or (f) The separate line of business manages a government facility pursuant to a government contract that specifies the benefits to be provided under a qualified plan. .04 A separate line of business is described in this subsection .04 if it meets paragraphs (1) through (3) of subsection .03, but fails to satisfy any of the standard access alternatives of paragraph (4) of subsection .03. The Service will issue a determination that a separate line of business meets the requirement of administrative scrutiny only when such a determination is consistent with the purpose of section 414® of the Code, taking into account the nondiscrimination requirements of sections 401(a)(4) and 410(B). .03 For a separate line of business described in section 3.03, the Service will take into account the factors enumerated in section 5 below and any other relevant facts and circumstances in determining whether such separate line of business satisfies administrative scrutiny. .04 For a separate line of business described in section 3.04, the Service will scrutinize all the relevant facts and circumstances, including the factors enumerated in section 5 below, more closely in determining whether a separate line of business satisfies administrative scrutiny. It is anticipated that in these cases the Service will determine that the separate line of business satisfies administrative scrutiny only in exceptional circumstances. Thus, an additional burden rests on the employer to demonstrate to the Service that relevant facts and circumstances unique to the employer support a determination that the separate line of business meets administrative scrutiny, despite its failure to satisfy any of the standard access alternatives of section 3.03(4)(a) through (f). SEC. 5. FACTORS TAKEN INTO ACCOUNT In accordance with section 4.03 and 4.04, in determining whether a separate line of business satisfies the requirement of administrative scrutiny, the Service will take into account all the facts and circumstances that it deems relevant, including, but not limited to, the factors listed below. No one factor is necessarily determinative. (1) Differences in property or services: The degree to which the property or services provided by the separate line of business differ from the property or services provided by the employer's other separate lines of business. (2) Separateness of organization and operation: The degree to which the separate line of business is organized and operated separately from the remainder of the employer, including the degree of vertical integration of the separate line of business with any other separate line of business of the employer and the degree to which the separate line of business has its own tangible assets. (3) Nature of business competition: The nature of the business competition faced by the separate line of business, the degree to which competitors of the separate line of business are organized as independent stand-alone companies that do not engage in other separate lines of business, and the type and level of benefits provided by competitors of the separate line of business to their employees. (4) Historical factors: Whether the separate line of business was acquired from another employer, whether it developed separately within the employer, and whether it was operated separately before the enactment of TRA '86. (5) Geographic factors: The degree to which the separate line of business is operated in a distinct geographic area from the employer's other separate lines of business, and the impact geographic factors have on the employer's compensation and benefit policies. (6) Safe harbors: The degree to which the separate line of business fails to satisfy the safe harbors of section 1.414®-5 of the regulations, in particular, the average benefits and minimum or maximum benefits safe harbors of sections 1.414®- 5(f) and (g). (7) Size and Composition: The size and composition of the separate line of business relative to each of the employer's other separate lines of business. This factor includes the number of employees, both highly compensated and nonhighly compensated, and the highly compensated employee percentage ratio (as determined under section 1.414®-5(B) of the regulations), in each of the employer's separate lines of business (whether or not a separate line of business for which an administrative scrutiny determination is being requested) as determined for purposes of section 1.414®-7 of the regulations. (8) Allocation method: Which allocation method for residual shared employees the employer applies under section 1.414®- 7© of the regulations, and the impact the allocation method will have on the number of employees who are treated as employees of each of the employer's separate lines of business. (9) Benefits provided by separate lines of business: The relative level of benefits provided by each of the employer's separate lines of business and the percentage of employees benefiting in each of the employer's separate lines of business. (10) Other separate lines of business: The degree to which the employer's other separate lines of business satisfy the requirements of a qualified separate line of business for the testing year under section 1.414®-1(B)(2) of the regulations. (11) Regulated industries: Whether the separate line of business operates in a regulated industry (i.e., whether the separate line of business furnishes or sells electrical energy, water or sewage disposal services; gas or steam through a local distribution system; telephone service or other communication services; or transportation of gas or steam by pipeline) if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. There is more...........!!!

Yes, but it is probably wiser to have one SEP adopted by both entities. Both plans must be identical in every respect, since all employees are treated as employed by the self-employed individual (for all puposes). Thus, very little is accomplished by having more than one SEP. Also, annual reporting rules are likely to be changed. One plan, one filing; two plans; two filings. Gains and losses from the two businesses are netted, and the owner's EI is the same (either way). One business could not have a SASEP and the other e/er only funded SEP. If there were a separate SEP and SARSEP (for both businesses) and eligibility differed, the top-heavy rules would apply to both plans (even if one weren't top-heavy).

QP-SEP Illustrator software programs for 2002 have been delayed - see "3Qs for IRS thread). SIMPLE Illustrator (v 2002) has already been released. I have not even begun to think about the TSA/MEC Calculator and Analyzer software, which I will prepare once IRS worksheets are finalized. For more information, all me at (317) 254-0385 [after 9 a.m. please - that's 10 a.m. if set to NY time] Note: I have heard that the IRS is standing by their draft worksheets (allowing elective and employer contributions to exceed earned income). The result would seem to conflict with IRC 401(d) in the case of a qualified plan (and, IMO, may result in penalties under IRC 4972). IRC 401(d) is not mentioned in IRC 414(v). Also, the IRS needs to have separate worksheets for Roth IRAs which generally have a $15,000 (not $10,000) spread.

Thanks (good idea), hopefully they will answer them in the Grey Book. To date I have not heard of any new developments in this area. Note: QP-SEP Illustrator software programs for 2002 have been delayed accordingly. SIMPLE Illustrator (v 2002) has already been released. I have not even begun to think about the TSA/MEC software, which I will prepare once IRS worksheets are finalized. For more information, all me at (317) 254-0385 [after 9 a.m. please - that's 10 a.m. if set to NY time] Note: I have heard that the IRS is standing by their draft worksheets (allowing elective and employer contributions to exceed earned income). The result would seem to conflict with IRC 401(d) in the case of a qualified plan (and, IMO, may result in penalties under IRC 4972). IRC 401(d) is not mentioned in IRC 414(v). Also, the IRS needs to have separate worksheets for Roth IRAs which generally have a $15,000 (not $10,000) spread.

I have received several inquiries regarding the Panel Answer Book series. Of the books that I write, edit, or contribute to-- (a) The Roth IRA Answer Book (3rd Ed) was recently released. (B) Simple, SEP, and SARSEP Answer Book (8th Ed) was recently released. The following books are in press and will be released by year end: © 457 Answer Book (2003 Supp) (d) Life Insurance Answer Book (2003 Supp) (e) Quick Reference to IRAs (2002?) (f) Individual Retirement Account Answer Book (9th Ed, Donald Levy) (g) Gov't Plans Answer Book (2003 Supp, Carol Calhoun & Cynthia Moore) (h) CRT/CLT Answer Book (1st Ed, George Jewell) I am also seeking some contributing authors to take over certain chapters (or write new chapters for) "c" and "d" above. If interested, please e-mail me at QPSEP@aol.com and also leave your telephone number. Please note that all books are distributed/sold by Panel Publishers. They can be ordered by calling (800) 638-8437.

If the amount is reported as income on the return (the correction, in the case of a self-employed) the 10 percent penalty can be avoided. [iRC 4972(©(3)] If the trustee is informed of the excess and requests that the amount be treated as an IRA contribution for 2002, they are supposed to recode the amount as such. SEPs are not coded by year. OTOH, Belgarath and Barry Picker have a good idea. Why not treat the excess as a 2002 SEP contribution. Incidently, I'll be away next week and am depending on you all to keep this message center going. I'll also be leaving a very large and vicious dog, Gracie the Beast Slayer, behind to watch over my manuscripts (and six cats and a ferocious mole).

No, unless they have no W-2 income.

October 3, 2002 TREASURY HELPS TAXPAYERS PRESERVE RETIREMENT SAVINGS BY ALLOWING A CHANGE TO PENSION DISTRIBUTION AMOUNTS Today the Treasury Department and the Internal Revenue Service released Revenue Ruling 2002-62 that will help taxpayers preserve their retirement savings when there is an unexpected drop in the value of their retirement savings. Some taxpayers began receiving fixed payments from their IRA or retirement plan based on the value of their account at the time they started receiving payments. Those taxpayers may now switch – without penalty -- to a method of determining the amount of their payments based on the value of their account as it changes from year to year. “Taxpayers have worked hard to build their retirement savings. They shouldn’t be penalized when the market is down,” stated Pam Olson, Assistant Secretary for Tax Policy. “This change will help many taxpayers to preserve their retirement savings by allowing those individuals to slow their distributions down in the event of unexpected market downturns.” Generally, taxpayers are subject to an extra 10% tax (in addition to regular income tax) on amounts withdrawn from their IRAs or employer-sponsored individual account plans prior to reaching 59½. An exception to that tax is when a taxpayer takes distributions as part of a series of substantially equal periodic payments over the taxpayer’s life expectancy or the joint life expectancies of taxpayer and beneficiary. The IRS issued guidance in 1989 (Q&A 12 of Notice 89-25) that provided three methods for satisfying the “substantially equal periodic payment” exception. Two of the safe-harbor methods described in Notice 89-25 result in a fixed amount that is required to be distributed and could result in the premature depletion of the taxpayer’s account in the event that the value of the assets in the account suffers a decline in market value. Revenue Ruling 2002-62 provides relief to taxpayers who selected one of these two methods by permitting them to change from a method for determining the payments under which the amount is fixed to the third method under the safe-harbor where the amount changes from year to year based on the value in the account from which the distributions are being made. In addition to permitting a one-time switch in method, the revenue ruling: *** Clarifies how an individual can satisfy the permitted method that tracks the required minimum distribution rules of section 401(a)(9) in light of the recent finalization of regulations regarding those requirements; *** Provides guidance on what constitutes a reasonable rate of interest for determining payments to satisfy the substantially equal periodic payment rule; and *** Provides a choice of mortality tables that can be used in satisfying the permitted methods. REVENUE RULING 2002-62 (click below) http://www.treasury.gov/press/releases/rep...ts/rr200262.pdf

The SEP-IRA is a traditional IRA; so that won't work. In general, the SEP will be amended by the sponsor. The IRS appears to require that SEPs (but not IRAs) be signed by employer. If the IRA accounts are moved away from the existing sponsor, the sponsor may or may not notify you of any changes made to the SEP (or IRAs). If the new IRAs are established as a SEP, the organization will require a model or prototype SEP be adopted.

You are correct in regard to SEPs. The following rule from Pub 590 regarding traditional IRA annual contributions was contained in a proposed rule that was never finalized (except for the Pub). Designating year for which contribution is made. If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Filing before a contribution is made. You can file your return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions.

1. Only if the contribution was "made on account" of such year. Having the trustee accept it as made for a prior year is usually sufficient. Generally, the contributon check is marker "SEP contribution {year}." But, the cover letter to the trustee and the trustee accepting (coding) it as a prior year contribution is also acceptable. 2. The SEP contribution (if rolled over) can never be used to fund employer-provided benefits in the DB. Before getting that extension, had anyone thought about making some of the DB contribution after the due date but before the time required under section 412 to satisfy the 25% (or min funding if higher) limit for at least 2002? FWIW, I have heard of situations where the 10 percent penalty on nondeductible contributions is paid annually. In some cases, the large current deduction offsets the annual loss of the penalty payment. Note: The fact that part of the contribution may not be deductible does make it an excess IRA contribuution. If deductible limit corrected to avoid 10% penalty, then an excess would appear to result in the IRA. Excesses in an IRA shd be corrected before any rollover is made to a separate account within the DB (if plan provides)(cd cost more to administer)(may offer greater creditor protection). Note: the 25% limit only applies because there is a DC (SEP) and DB plan. A contribution of the minimum funding limit amount is deductible even if the 25% limit is lower. There is a carryforward [and penalty; the panalty disappears after it has been corrected] for unused deductions

Yes and No. The amount can be withdrawn (but there is a special rule special rule for elective contributions). Nonetheless the amount will still be considered as contributed and eats up the DC limit under Code Section 415 (i.e., as a contribution to a profit sharing plan)- which isn't ordinarily an issue any more. For deduction purposes, the DB required contribution can be made, otherwise the deductible limit is 25% of compensation paid or accrued during the year (see IRC 404(a)(7)(A). There is a carryover-- or-->. For puposes of the 10% penalty on nondeductible contributions, the overage (if any) can be picked up as EI by the self-employed (corrected) and that amount then treated as an excess IRA and withdrawn by the individual by the due date of the individual's return (or that date as otherwise extended).

Appleby, you are correct. The leased employee's would have to be covered in the SIMPLE IRA if they satisfy the eligibility requirements as the model forms do not permit them to be excluded. A prototype SIMPLE IRA plan could exclude leased employees described in Code Section 414(n). To be excluded, however, such employees would have to be participating in a money purchase pension plan of the leasing organization that provides for a 10% or more nonintegrated contribution and be fully vested in all contributions. If so, the prototype would also have to affirmatively exclude them. The leased employees could be in both plans, but could not in the aggregate defer more than the 402(g) limit on an excludable basis. Amounts above that limit would have to be corrected (in the 401(k)) and included in income.

None. However, the amendment if done now would require SIMPLE notices to be given on Nov 2 if knowing all participants on January 1 is important.

The model SEP document does not permit integration. Suggest you adopt another sponsor's integrated prototype SEP.

An employer may not maintain a SIMPLE IRA in a year that it also maintains a qualified plan such as a 401(k). [iRC 408(p)(2)(D)]

Generaly the CLE contributions can be allocated in any reasonable manner (e.g., on entity compensation up to $170K). From your facts the owner does not have any W-2 wages (just EI). His/her contribution is attributable to just one entity (not shared). Best I cd do with your facts. Hope this helps.

Not really, although a fiscal plan year can be changed to the calendar year. Code Section 415 limitation years can be changed. But, regulations require that contributions be tested on compensation for the entire year. The 125 percent ADP test is also based on compensation for the plan year. It is unclear whether the $160,000/200,000 compensation cap has to be prorated. No guidance on issue. Any one who would have entered the plan during the full plan year would also have to be considered. Once terminated, it is unclear whether a SARSEP can be readopted (my guess is "no"). Hope this helps.

Sherry, Essentially correct. The excess simple contributions for the year would be treated as EI. It is then removed by the individual, adjusted for gain/loss, generally on or before the tax filing date to avoid the 6% penalty tax. The IRS has unofficially indicated that the 2-year (25% penalty) rule would not apply. If under 59-1/2, the 10% penalty might apply. Convincing the bank that the 25% pernalty doesn't apply may be tough (cd always work it out with an explanation on the tax return). Hope this helps